Reducing the CCAR pain

Using software to automate many steps of the CCAR annual submission

By Craig LeBlanc, Business Solution Architect, SAS

The US Federal Reserve requires US bank holding companies with assets of $10 billion or more to submit to an annual capital planning review process referred to as the Comprehensive Capital Analysis and Review (CCAR). The degree of documentation and the number of submissions can be time-consuming and frustrating. But an analytics solution that meets current requirements and provides flexibility to address any future regulations can help reduce some of that pain.

The objective of CCAR is to ensure that large, systemically important banking institutions have forward-looking, institution-specific, risk-tailored capital planning processes. A bank holding company is expected to have credible two-year, pro-forma plans that show that it’ll have enough capital to operate as usual – under adverse conditions – while still meeting Basel regulatory capital standards. CCAR includes a supervisory stress test designed to test the competency of the firm’s internal capital adequacy analysis.

To be successful, banks need both an infrastructure and a process for identifying businesses that create long-term value.

The Federal Reserve requires three types of submissions:

The biannual submission (FR Y-14A) is submitted via the Federal Reserve’s predefined Excel workbook. Each scenario is covered in a single workbook. Each workbook contains multiple worksheets that must be populated.

The quarterly submission (FR Y-14Q) consists of several predefined Excel workbooks (each for a different asset class) to itemize and describe the bank’s assets.

The monthly submission (FR Y-14M) is submitted as a single bar-delimited text file (similar to a csv file using a | character as a delimiter). It contains one record per active loan within the bank’s inventory.

The submissions – theoretically – can be developed and submitted using the bank’s existing risk and finance infrastructure, with a few minor modifications. But there are some difficulties that you might face when using a finance system for CCAR:

The finance system was chosen and configured for a different, if somewhat related, purpose by a group with different responsibilities (even if both are within group finance).

Trying to use the existing finance system for a secondary purpose is likely to be met with a lot of internal resistance.

Using an existing finance system means that you will need to create the capital planning environment and logic from scratch.

However, an analytic solution that is built to facilitate collaboration between risk and finance can produce some significant technical and business benefits.

On a technical level, integrating risk and finance operations allows you to reconcile source data with the general ledger. That can ensure a common dialect and dialogue between these two groups and create an exceptional level of transparency. You’re no longer having meta-discussions about data definitions and sources. Instead, you’re focusing on the strategic matters that drive your business. You focus on loan provisioning, Basel II reporting, IRS calculations. That means you derive greater value from these IT investments.

Ideally, good risk-management practices should happen even without the prodding of regulators. They should be the kinds of functions and analyses that banks do regardless of external compliance requirements. Integrating risk and finance at a fundamental level opens up new opportunities to transform the investments you make for basic regulatory compliance into operational advantage. That’s because you use the same data and IT infrastructure to improve your operations and profitability.

Activities such as stress testing can also find benefits from the integration of risk and finance environments. Traditionally, financial institutions have examined macroeconomic conditions and applied sophisticated (sometimes fragile) models and formulas to forecast the future. Unfortunately, as we’ve seen regularly, that’s a flawed approach: once you make a forecast, it’s immediately out of date and incorrect. There are too many variables and uncertainties to account for. When we integrate risk and finance, however, we can more easily and thoroughly create rigorous stress tests that present more value

To be successful, banks need both an infrastructure and a process for identifying businesses that create long-term value. The system must also be equipped to restructure businesses that are inefficiently managed but have growth potential. Such an infrastructure can provide tremendous insights, enabling users to do exploratory what-if analyses as they evaluate various options to decipher the best course of action for capital management.